1. The Commissioner of income-tax has referred the following question to us:
Whether on the facts of this case the sum of Rs. 6,967 being the interest on the liabilities allotted to the share of the petitioner-family on the dissolution of the two firms in which it was a partner is allowable as a deduction against the profits and gains of the businesses carried on by it on its own account during the year of account.
2. The facts with regard to this matter can, be shortly stated. The petitioners constitute a Hindu undivided family and carry on a money-lending business at Ootacamund. Up to the 24th May, 1929, they also owned a half share in a firm styled 'K.G.S. and Co.' and a two-fifths share in a firm styled 'B.K.S. and Co.' doing other classes of business in Ootacamund. These two firms were dissolved on the 24th May, 1929, an account was taken of their assets and liabilities and those assets and liabilities, when ascertained, were distributed between the petitioners and another partner named B.K. Sunchai Gounder. The total of the liabilities falling to the share of the petitioner-family was Rs. 55,584. On this liability of Rs. 55,584 which represented borrowed money a sum of Rs. 6,967 was due for interest at the time when the two businesses were dissolved and none of this interest had been paid. What the petitioners here seek to do is to deduct that sum of Rs. 6,967 from the profits made by them in their joint family money-lending business. The following facts have been found by the Income-tax Commissioner--and indeed they were admitted by the petitioners--viz., (1) that the deduction claimed represents the interest on capital borrowed entirely for the purpose of the two partnership businesses, viz., 'K.G.S. and Co.' and 'B.K.S. and Co.' in which the petitioner-am, therefore, of opinion that the interest paid by the petitioners on this borrowed capital during the year of account is neither interest on capital borrowed for the purposes of any of their businesses within the meaning of Clause (iii), Sub-section (2) of Section 10, nor expenditure incurred solely for the purpose of earning the profits or gains of any business carried on by the family within the meaning of Clause (ix), Sub-section (2) of Section 10. Nor is it a loss or share of loss (of profits or gains) from another business which can be set off under Section 24 of tne Act, because it is a loss of a capital nature. I therefore submit that the question should be answered in the negative. family had a share, (2) that the said borrowed capital was raised by the two firms (by one of the two partners or by both of them jointly, acting on behalf of the two firms) from third parties and not from any of the petitioners'1 businesses, (3) that such borrowed capital was actually utilised in the two partnership businesses, and (4) that on the dissolution of the two firms on 24th May, 1929, the petitioner-family took over the liabilities of the two firms to the extent of Rs. 55,584 and paid Rs. 6,967 as interest thereon during the year of account. Upon those admitted facts the Income-tax Commissioner was of the opinion that the sum of Rs. 6,967 was not an amount which could be deducted from the profits made by the petitioner joint trading family in Ootacamund in respect of the money-lending business. The argument put forward by Mr. S. Duraiswami Aiyar proceeded to a great extent to the consideration of the question as. to whether, when an assessee is carrying on more businesses than one and in respect of one of them he has to borrow capital and pay interest thereon and in respect of that business in the year of account a loss results, such interest paid in respect of that borrowed capital can or cannot be set off against the profits made by the assessee in some other business, We were referred to decisions of this Court in support of that argument. It was not contended by Mr. Duraiswami Aiyar that any such deduction, which of course would be one: under Section 10(2)(3) of the Indian Income-tax Act, could be made directly from the profits and gains of the other business; but his contention was that in respect of the business in which the capital was borrowed and interest upon which was paid and sought to be deducted in the ascertainment of the profits or gains of that business, obviously the deduction allowed under Section 10(2)(3) could be made with a view to ascertaining whether that business had been carried on at a loss or profit. If it was discovered that the business was carried on at a loss, then it was contended that under Section 24 of the Act that loss, so ascertained, could be set off against the profits and gains made in the other business. With that contention we entirely agree. It seems to be quite clear that where more Businesses than one are carried on, what has to be ascertained is whether they have resulted in a profit or whether one or some of them have resulted in a profit and others in a loss. If it is discovered that there has been a loss in one or more of them, that loss can, in our opinion, be set off under Section 24 of the Act against the profits and gains of the other businesses of whatever description and this view we take despite that taken by a Bench of this High Court consisting of Sir Walter Schwabe, C.J. and Waller, J., in Commissioner of Income-tax v. Anmachalam Chettiar. (1924) I.L.R.47 M.660 : 46 M.L.J. 68. In that case it was held that where a person carries on two different trades, one individually and the other as a member of an unregistered firm, he is under Section 10(2) of the Income-tax Act (XI of 1922) entitled to set off, for purposes of income-tax, the loss incurred by him in respect of the partnership trade against the profit made by him in his individual trade. The view taken in that case by Sir Walter Schwabe, C.J., was that the loss made in the one trade could not be set off against the profit made in the other under Section 24 because in his view that only enabled a loss in one class of business to be set off against the loss in another class of business. That, we think, is an incorrect view to take of that section; and the later decision of this High Court in The Commissioner of Income-tax v. Suppan Chettiar (1930) I.L.R. S3 M. 702 : 58 M.L.J. 46 (F.B.) which takes the view that loss in one kind of business can be set off against a profit in a similar or other kind of business, is in our opinion correct upon that point. But in The Commissioner of Income-tax v. Arunachalam Chettiar (1924) I.L.R. 47 M. 660 : 46 M.L.J. 68 holding the view that Section 24 of the Act did not apply, the Bench then held that under Section 10 the assessee was entitled to set off his loss in respect of one business against his gains in respect of the other taking the view that the words 'profits or gains of any business carried on by him' mean 'profits or gains of each and every business' carried on by him. It is not necessary; for the purposes of this case to say more than that we doubt the correctness of that construction. The view we take is that the loss in one business after having been ascertained under Section 10 can be set off under Section 24 against the profits and gains in another business. That, however, does not conclude the matter because it is argued by Mr. Patanjali Sastri that we are not here considering any question of profits and gains made by the dissolved business in the year of account but what we are considering is all distributions of capital. It is pointed out that what happened when these two businesses were dissolved was a distribution of the assets and liabilities of these two businesses and that some assets fell to the share of the petitioner-family and also some of the liabilities, the liabilities in respect of which interest amounting to Rs. 6,967 had to be paid and in respect of which this deduction is claimed in this case. The argument on behalf of the assessees has proceeded on the footing that this is to be dealt with as a trading loss and that, if it is to be considered as a trading loss, the interest can be deducted from the profits, if any, of these businesses under Section 10(2)(3) and the loss resulting from such deduction can then be deducted from the profits made by the undivided family; but it seems to me to be quite clear that we are here dealing with capital loss as opposed to trading loss. Section 24 speaks of loss of profits or gains; that means trading loss. This was not a trading loss in any sense. In this case the property of these two businesses was distributed after their dissolution; and it was capital; and authority for this view is to be found in the case of Inland Revenue Commissioners v. Burretil. (1924) 2 K.B. 52. There on the winding up of a limited company the undivided profits of past years and of the year in which the winding up occurred were distributed among the shareholders of whom the respondent was one and it was held that super-tax was not payable on the undivided profits as income, because in the winding up they had ceased to be profits and were assets only. Several cases are referred to in the course of the judgment of Pollock, M.R. Amongst them is In re Armitage 4 where Lindley, L.J. observed as follows (page 346):
The moment the company got into liquidation there was an end of all power of declaring' dividends and of equalising dividends, and the only thing that the liquidator had to do was to turn the assets into money, and divide the money among the shareholders in proportion to their shares
and another case is In re Crichton's Oil Co.5 where Stirling, L.J., held that upon a voluntary liquidation a surplus of trading profit made in a particular year was distributable rateably among all the shareholders as capital, and was not to be devoted as profits in the payment of a cumulative preferential dividend. These cases are of assistance to us in this case. It seems to me that what really was done in this case was to make a distribution of the property of the two businesses and that it was not open to the assessees to say upon such a distribution that some part of it represented trading profits and some part of it trading losses. It was in fact capital and, had there been any profit to the assessee on that distribution, it could not have been, it is conceded by Mr. Patanjali Sastri, liable to payment of income-tax. It follows, therefore, that where the distribution results in a loss no deduction in respect of that loss, such as is claimed here, can be claimed by the assessee. Under these circumstances, the answer to the question referred to us must be in the negative. Costs Rs. 250 to the Commissioner of Income-tax.